Tyre exports are estimated to grow by 10 per cent in FY2018 and by 8-10 per cent over the next three years led by stable demand and increased acceptance of Indian tyres in overseas markets, both in terms of quality and pricing.New Delhi: The domestic tyre industry is expected to post volumes growth of 7-8 per cent to 1,805 lakh tyres during FY2018, despite the weak volumes during the first quarter and part of second quarter during GST rollout.

In tonnage terms, tyre demand is estimated to grow 7 per cent during FY2018, supported by pick-up in T&B replacement demand after over two years of weak growth and; for FY2019, the unit and tonnage growth is pegged at 8-8.5 per cent and 6.5-7 per cent, respectively, as per an ICRA note.

Subrata Ray, sr. group vice-president, Corporate Sector ratings, ICRA, said: “Tyre volumes across all the commercial segments de-grew during the first half if FY18, due to Goods and Service Tax (GST) implementation, which impacted the first quarter of FY2018 demand due to de-stocking by dealers.”

“However barring this short-term aberration, the domestic tyre demand has remained favourable during the year and likely to recover in the second half of FY2018. Further a rebound in automotive production across the product segments is expected to have a cascading impact on original equipment tyre demand during the year.”

Regarding tyre exports, the same have remained strong for the second straight year, led by revival in demand across product segments. Following a 27.5 per cent growth in FY2017, exports volume increased by 14.1 per cent during the first half of FY2018.

In value terms, the growth in exports came a bit lower at 13.3 per cent, as realizations remained tepid; the pricing was constrained by softened RM prices. While overall tyre exports grew by 13 per cent during FY2017, the growth in exports to the top 10 countries was higher at 18 per cent, aided by steady demand in most of the regions, barring the UAE and Philippines.

Tyre exports are estimated to grow by 10 per cent in FY2018 and by 8-10 per cent over the next three years led by stable demand and increased acceptance of Indian tyres in overseas markets, both in terms of quality and pricing.

However, with rising penetration of low cost Chinese tyres in overseas markets, especially post the removal of anti-dumping duty (ADD) by the US on the Chinese tyres in February 2017, competition from China (both in terms of volumes and pricing) will remain a key challenge.

Following the ADD imposition on the Chinese tyres by the US in FY2015 and removal of ADD on the Chinese tyre imports to India in FY2015, TBR tyre imports to India had witnessed a sharp growth in FY2016 and FY2017.

However, due to the demonetization effect and with the US ruling out ADD on Chinese tyres in February 2017, tyre imports have de-grown by 10.5 per cent (in value terms) and 2 per cent (in volume terms) during the first half of FY2018.

This apart, the re-imposition of ADD by the government on 19 September 2017 on import of new Chinese TBR (including tubeless) for five years, is likely to keep the imports lower going forward.

China cornered a lion share with 90 per cent of TBR tyres originating from China in FY2017. With the competitiveness of Chinese players diminishing post ADD, it provides level playing field for Indian T&B tyre makers.

“ICRA expects the capacity addition in the industry to continue over next five years given the large cash balances, strong accrual position and favourable demand scenario. Capex are likely to continue with planned Rs 25,000 crore of investments spread across the next five years,” added Ray.

As for raw material prices impact on the industry, while there was an interim spike of 30 per cent during Feb-Mar’17, the natural rubber (NR) prices have subsequently declined sharply and been trading at an average of Rs 130 per kg during 9m FY2018, in line with FY2017 levels.

Due to subdued demand, NR consumption increased by only 1.9 per cent during 5m FY2018 vis-à-vis a 5.7 per cent rise in production levels. Global NR prices continue to trade at a discount of 10 per cent averaging at Rs 118 per kg during 9m FY2018.

Slowing demand from China, the US and Japan coupled with higher output have kept the global prices lower. Against a 4.7 per cent y-o-y increase in production, the global NR consumption increased by just 1.2 per cent during January to November 2017. Global NR prices are expected to increase by over 15 per cent and domestic NR prices to trend in the range of Rs 135-145 per kg over the next three months.

WTI crude oil prices have increased to $59.5/bbl in December 2017 (up 20 per cent since October 2017), primarily be attributed to geo-political tensions from countries like Iraq-Kurdistan, Libya and Nigeria, fears of sanctions on Iran by the US, expectations of extension of timeline for production cut back by OPEC and few non-OPEC countries and the recent higher-than-anticipated global demand growth of petroleum products.

ICRA expects the prices of crude derivatives to increase by 15-20 per cent in the fourth quarter of FY2018 due to the time lag effect of the 20 per cent spike in oil prices during October-December 2017.

Following the 10 quarters of subdued performance, the industry revenues grew by a sharp 12.6 per cent during the second quarter of FY2018. The growth was fuelled by strong volumes across product categories, especially in the OE segments, even as realizations remained weak.

On the margin front, with the softening of RM prices since April 2017, the industry recovered back to its normal levels of margins in the second quarter of FY2018, following an exceptionally weak performance in the preceding quarter. Nevertheless, the second quarter margins are still lower than FY2017 level (considered one of the best years for the tyre industry), due to steep correction in RM prices. Industry wide operating and net margins expanded by 670bps and 400bps Q-o-Q, respectively.

ICRA expects the tyre industry (represented by ICRA’s sample of seven major tyre companies) to post 8-10 per cent growth during FY18-22. While price cuts during 9MFY17, capped revenues during FY2017, price hikes between Jan-May’17 coupled with modest volume growth is expected to support a 7-8 per cent revenue growth during FY2018; during the first half of FY18, the industry posted 6.7 per cent growth in revenues.

Despite heavy capex in the coming five years FY18-22, the industry is expected to fund the same from the significant pile of accruals during the past three years, leading to a stable credit profile for the industry.

​​This comes as a surprise to the industry as Rakesh was recently elevated to the position of Directo Sales and Marketing which was the third promotion for him in six years of his tenure in the company.